Gone are those days of keeping your funds locked in only an FD/RD or a savings account. The world is changing rapidly, increasing the basic needs of humans to more than food, clothing, and shelter.
Today, non-senior citizens' basic fixed deposit rate is lower than ~ 6.5%. And with inflation at around 6.4%, you barely breaking even after taxes and charges from the traditional investment instruments. Thus, the value of your stored funds isn't growing but remains stagnant.
Source: Stable Investor.
In such cases, you must look for better asset classes where your capital will grow and provide you with some passive income with time. Some of these investments can be in,
- Real Estate
- Commodities like gold, silver, etc.
- Equity stocks, Exchange Traded Funds (ETFs), Mutual Funds (MFs), etc.
This article will focus primarily on investing in stock markets and its advantages. However, it will also look at some ideal percentage allocation of your assets in equity and other investment classes.
What Are Stock Markets?
Stock markets are similar to digital e-commerce stores, but instead of physical things, you get to buy a small portion of different companies in the form of shares. In India, there are two main stock markets or stock exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), where investors can buy and sell shares of publicly traded companies.
The stock market offers numerous benefits, such as the potential for high returns, diversification, liquidity, and tax benefits. However, investing in stocks also involves risks and requires careful research and analysis, as discussed below.
Why Invest In Equity Markets?
If you look at historical returns, the equity markets offer higher returns over the long term than other investment options, such as bank deposits, real estate or bonds.
Although past performance does not guarantee future results, there is a high probability that the equity markets will continue outperforming other asset classes.
The 77% rise in 2021 was due to the recovery after the market drop in 2020 due to Covid-19. But as seen in the above illustration from Mint, Sensex has been beating other assets by a good margin over the years.
Besides the lucrative profit figures above, investing in equity markets also allows investors to diversify their portfolios, which can help to manage risk.
By investing in various stocks across different industries or sectors, investors can spread their risk and potentially reduce the impact of market fluctuations on their portfolios.
If you are still trying to choose the stocks or instruments for investing, you can always opt for an index fund for investment, as it tracks the market and will give returns based on the market's overall performance. We have written a detailed article on Index funds and why you should invest here.
Advantages Of Investing In Stock Markets
Investing in stock markets offers numerous advantages for you. Here are some of the key benefits of investing in stock markets:
- Potential for High Returns: As referenced above, historically, the Indian stock markets have generated higher returns compared to other investment options, such as bank deposits or bonds.
While past performance does not guarantee future results, the potential for high returns makes investing in the stock markets an attractive option for investors looking to grow their wealth over the long term.
- Diversification: Investing in the stock markets allows you to diversify your portfolios across various companies and asset classes. Investing in multiple stocks can help you spread your risk and potentially reduce the impact of market fluctuations on your investment portfolio.
- Liquidity: Liquidity means the ease of getting in and out of any investment. There are crores of buyers and sellers in the stock markets, so you can easily buy and sell stocks as needed. This makes it easy to rebalance your portfolio to your financial goals.
- Ownership: The markets provide investors with ownership in publicly traded companies. As owners of these companies, you can benefit from the company's growth and success through capital appreciation or dividend payments. As an investor in these companies, you are also entitled to dividends, stock splits, bonuses, etc.
- Tax Benefits: Indian tax laws provide certain benefits for investors in stock markets. Long-term capital gains from equity investments are taxed at a lower rate (10%) than short-term gains (15%), incentivising investors to hold onto their investments for longer periods.
Risks Associated With Investing In Stock Markets
Besides the above advantages, it's important to note that investing in the stock market also carries risks. Here are some of the key risks that you should be aware of:
- Market Volatility: Equity markets are known for their volatility, which means prices of stocks go up and down daily. The volatility might create panic among investors, who are not used to seeing such a rapid incline and decline in their portfolio values. Changes can influence market volatility in economic conditions, geopolitical events, and company-specific news, pandemics, and hence is volatile.
- Company-specific Risks: Investing in individual stocks also carries company-specific risks. These risks can include factors such as changes in management, legal issues, and competition. In addition, a particular company's poor performance or financial difficulties can lead to a decline in the stock price, resulting in significant losses for you.
- Liquidity Risk: Equity markets provide liquidity, but not all stocks are equally liquid. Smaller companies or those with less trading volume may be harder to sell quickly, potentially resulting in lower prices or losses for you.
- Economic and Political Risks: The performance of equity markets can be impacted by economic and political factors, both domestically and internationally. Economic recessions or political instability can lead to declines in stock prices, potentially resulting in losses for investors. One recent example is the Russia-Ukraine war, which impacted the equity markets during the start of the war last year.
It's essential for investors to consider the risks associated with investing in equity markets carefully and to take steps to mitigate these risks. This can include conducting thorough research and analysis before investing in individual stocks, diversifying investments across various companies and industries, and maintaining a long-term investment horizon to ride out market fluctuations potentially.
In conclusion, investing in the stock market has several advantages, including the potential for high returns, diversification, liquidity, tax benefits, and inflation protection.
However, it's important to remember that investing also carries risks, such as market volatility and company-specific risks. Despite these risks, historically, the Indian stock markets have generated higher returns compared to other investment options.
Therefore, investing in the stock markets can be an attractive option if you want to grow your wealth over the long term. However, it requires careful research and analysis to make informed investment decisions.